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An Overlooked Obamacare Flaw: Too Many Choices

A volunteer counselor with Insure Central Texas uses a chart to help explain health insurance option in Austin, Texas. Texas hospitals, clinics and charities are gearing up to help uninsured Texans enroll in health care exchanges after Gov. Rick Perry declared the state government would do as little as possible to help implement the Affordable Care Act.

If you’re among the millions of people who have struggled to find affordable health insurance, you might be delighted to hear the Affordable Care Act, now up and running, will offer dozens of insurance plans at reasonable prices. But, believe it or not, fewer choices might actually encourage more people to sign up.

It’s an article of faith among free-market mavens that the more choice consumers have, the better off they are. It doesn’t work out that way in real life, however. When faced with too many choices, consumers sometimes experience a kind of mental paralysis that leads them to make no decision at all. And when they do make a decision, they tend to make irrational choices that don’t really provide what’s most important to them.

Obamacare, as the Affordable Care Act is popularly known, opened its online state-run exchanges on Oct. 1. The government says the typical family will be able to choose from 53 health plans, on average, with a few states, including Florida and Arizona, offering more than 100. That’s a dizzying number of choices.

"People will make bad decisions"

“There’s no way people are going to be able to make optimal decisions, except by luck,” says Barry Schwartz, a psychology professor at Swarthmore University and author of The Paradox of Choice: Why More Is Less. “If you have 40 or 50 insurance possibilities, there will be less uptake and people will make bad decisions.”

The seminal study of excessive choice was a 2000 paper recounting an experiment at a California grocery store in which two tasting tables were set up side-by-side: one offering samples of six jams, the other offering samples of 24. The “extensive” selection of jams attracted more shoppers than the “limited” selection. But only 3% of the extensive samplers made a purchase after tasting. Of those who sampled from the limited selection, 30% made a purchase.

“An extensive array of options can at first seem highly appealing to consumers,” the researchers concluded, “yet can reduce their subsequent motivation to purchase the product.” Too much choice, they found, can be "demotivating" and leave shoppers confused.

The same dynamic applies to decisions in which a lot more is at stake than deciding what to spread on your toast. After the government passed the Medicare Part D prescription drug benefit in 2003, seniors suddenly could choose from dozens of plans that would help lower their prescription drug costs. But many found the offerings so confusing they didn’t sign up, while others mistakenly chose a plan that didn’t lower their costs nearly as much as it could have.

“Decision quality deteriorates as the number of plans increases,” one study reported. “Moreover, seniors exhibit greater confidence than younger people that they are able to choose the lowest-cost plan, when the opposite is the case.”

"Choice overload"

Another study found that “choice overload” discourages workers from participating in 401(k) retirement plans, even though it’s clearly in their best interest to do so. Using data on real-world retirement plans provided by financial firm Vanguard, researchers found that employees were less and less likely to participate in a 401(k) plan as the number of investment funds they could choose from increased. In plans that offered only two funds, participation was 75%. In a plan that offered 59 funds, participation was only 60%.

Obamacare includes one feature that ought to help people sort through numerous options. Since health plans come with “bronze,” “silver,” “gold” or “platinum” designations, shoppers have one tool to guide them toward plans that offer more benefits at a higher cost, or fewer benefits at a lower cost. That’s similar to the “tiering” feature some analysts recommend for 401(k) offerings, to help consumers differentiate among products with similar sets of features. And as shoppers probing the offerings on a health exchange provide personal information in an online selection tool, the number of choices may narrow based on family status, location, income, needs and other factors.

But Obamacare will still require consumers to do extensive research to figure out which health plan might be best for them. And while the law does require nearly everyone to have insurance, it lacks one feature that almost always helps boost participation rates: Automatic enrollment in a given plan, which requires consumers to opt out if they don’t want that plan, rather than opting in if they do.

In addition to simply educating themselves and learning the details of various plans, consumers can help themselves make better decisions regarding health insurance by seeking professional advice (while also being alert to fraud) and being pragmatic. One reason a surfeit of selections can lead to decision paralysis is that people feel pressured not just to make a good choice but to make a perfect choice. Buying health insurance isn’t for perfectionists, however, especially since it can be impossible to predict what your family’s medical needs may be in the future. So a good plan ought to be one that’s good enough, and fits your budget.

Schwartz suggests consumers narrow down their needs to just one thing that is most important, whether it’s coverage for your kids, expansive prescription drug coverage, a low premium or something else.

“Figure out the one dimension of this decision that is most important to you, and ignore all the unimportant details,” he advises. With luck, that will help reduce the choices to a manageable few — and inoculate you against decision paralysis.